An academic study suggests that symbolic environmental, social and
governance actions have a greater positive impact on a company’s market value
than substantive actions.
Previous studies have concluded that ESG actions have a statistically
significant, yet small positive affect on financial performance. The
authors of Do
Actions Speak Louder Than Words? The Case of Corporate Social Responsibility wanted
to explore under what conditions CSR affects financial performance.
Olga Hawn, a professor in the Fuqua School of Business at Duke University,
and Ioannis Ioannou, a professor at the London School of Business, examined not
just the different impact of symbolic and substantive actions on the value of a
company, but the way it was influenced by prior CSR-based assets – which
represent the cumulative results of taking CSR actions in the past.
The authors found symbolic actions have a higher impact on market value than
substantive actions, when the company has higher CSR-based assets. The study
also concluded that a larger gap between symbolic and substantive actions
has a higher positive impact on firm performance; and the more companies engage
in both symbolic and substantive actions, the higher the value accumulates to
the company.
Symbolic actions include any ceremonial conformity or compliance: for
example, a company announcing plans to form a sustainability or corporate
ethics committee to provide the appearance of an action,
without necessarily having any substance. Symbolic actions can be more
generally described as “window dressing” or greenwashing – essentially anything
designed to give an appearance of an action while allowing business to proceed
as usual.
Substantive actions are the real actions taken by an organization to meet
certain expectations and often require changes in core practices, long-term
commitments and investments in corporate culture.
The authors weighed four hypotheses and tested their theory using a
market-value equation and a database of 2,261 firms in 43 countries from 2002
and 2008.
The four hypotheses:
- The higher the CSR assets (meaning prior CSR actions taken by a company), the higher the effect that symbolic ESG action will have on firm performance, and vice versa;
- The higher the CSR assets, the lower the effect that substantive ESG actions will have on firm performance, compared to symbolic actions, and vice versa;
- The larger the gap between symbolic and substantive ESG actions, the higher its effect on firm performance, and vice versa;
- The higher the coupling between substantive and symbolic ESG actions, the higher its effect on firm performance, vice versa.
A Deloitte report released last month found a connection between perception
of stakeholders and a company’s
bottom line. News about a company’s environmental behavior affects
its market value, and an organization’s understanding of how its stakeholders
perceive and value the organization’s ESG issues can lead to financial
benefits, the report said.
A report published the same month by The Conference Board says shareholders
are placing more value on corporate sustainability initiatives and are becoming
increasingly interested in
linking performance to executives’ compensations. Intel, Xcel Energy, Alcoa
and Shell are among companies that have tied executive compensation to
sustainability performance.
